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Rentals Owned by an LLC Fallacy

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Last updated: 21 Sep, 2014
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By Jason Watson ()
Updated September 2, 2014

Should you put a rental in an LLC? Sure. Why not? Everyone else does. The real answer is Perhaps.  There are several myths out there regarding the use of an LLC as a shelter from potential lawsuits and litigation, but most concerns stem from tortious liability.

So, what do you do? Securing a decent umbrella policy both at the personal and commercial level is the Watson CPA Group’s strong recommendation for liability arising from your acts, errors and omissions. General umbrella policies are $300-$500 per year. The liability floor of many umbrellas is around $500,000 so you might have to raise the liability limits of each rental to meet the floor (so there’s no break in coverage).

It appears that many credible lawsuits will sue to the limit of coverage to avoid lengthy and expensive trial litigation. Again, please consult your attorney for your unique situation. And no, we don’t sell insurance.

Specifically for landlords, keep your rental in proper working order- tight railings, shoveled sidewalks and driveways, cooler hot water temperature settings, newer tempered windows, update smoke detectors, CO2 monitors, etc.

If you think you’re clever and quit-claim the title / deed to the LLC after you close on the loan be careful. The lender might catch wind of it through routine title checks that they now perform, and the lender might call the loan. Not good.

Having said all that, it is not a bad idea to have an LLC own your rental property if you can. If you can avoid having to personally sign for the mortgage note through a non-recourse loan, that would be helpful too (lenders usually want a maximum of 60% loan to value). You might also consider having your tenants sign Hold Harmless Agreements. Essentially you are adding layers to your liability onion.

Additionally, if you are investing with partners an LLC with a solid operating agreement might be the only way to properly handle the ownership. A common situation is where two unrelated people invest together and need ways to affect ownership changes. Of course the Watson CPA Group can assist you in creating the LLC.

On small side note- real estate professionals might also be creating a mess with the material participation definitions within a partnership LLC. If you are considering to claim the real estate professional designation, we encourage you to read our recent tax article on the subject-


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item What is active participation versus material participation?
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item What are tax issues with an LLC owning a rental property?
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